Is China Really Dumping Treasuries?

Despite claims to the contrary the Chinese are savvy capitalists and even savvier traders. Consider the stockpiling of commodities at recent lows and the subsequent sales being made at elevated prices. The trading acumen extends to the Treasury market as well.

To understand the Chinese slight of hand we must first understand the classifications in the TIC data. The country to which a T-bond/note purchase is attributed may not be the country that is ultimately the owner of the security. If a foreign entity purchases Treasury bonds through a British investment bank then the purchase is attributed to Britain.

Looking at the TIC reported holdings of Treasury securities we find that the United Kingdom has increased its holdings by 289% over the last year. In June 2008, the UK purchased $55 billion in Treasuries while in June 2009 the UK purchased $214 billion a $51 billion increase from May.

At first read, one might assume that the British are snapping up US debt, but remember the UK is major financial center. The increase in UK purchases of debt is more likely attributed to foreign entities (read China) simply placing buy orders through UK brokers. In this way, purchases are disguised and the Chinese appear as though they are selling Treasuries.

Additionally, the TIC data showed private buyers of Treasuries surged in June. Once again, the nomenclature is misleading. Private foreign buyers include international and regional institutions which count sovereign wealth funds among the ranks.

So while it may appear that official purchases from China have declined, it is highly likely that they are simply using the SWF to purchase securities through a UK bank. Ultimately these securities can be transferred to the official reserves and evade Treasury detection.

In a blatant attempt to strike fear in the heart of Tim Geithner, China Daily ran a front page story touting the Chinese reduction in holdings of US debt. China Daily is a state run newspaper and is often used as a propaganda tool for the Chinese government. In this case, the tool is doing its job.

Disclosure: Long IEI

Comments

[TradingHelp...:]

China needs to reduce its growth of exposure to US debt but surely it can unload current holdings in any volume because the price would collapse destroying the value of its remaining holdings. But going forward clearly it needs to reduce new purchases.

In any event it's not good for the dollar.

Aug 24 04:24 AM

[Living4Divi...:]

Great post.

The dollar is going away as a reserve currency, no doubt about it. The question is when. The good news is that it is in China's best interest to make the transition an orderly process. The dollar's decline will be slow.

Aug 24 07:23 AM

[Dave Wrixon:]

I am not quite sure why China would need or want to carry on buying whilst appearing to dump.

I could understand why say the Federal Reserve would wish to camouflage the identity of the real buyer in this way.

Aug 24 07:52 AM

[prairiedog555:]

The parasite cannot kill the host.

Aug 24 09:05 AM

[nobby73:]

"The increase in UK purchases of debt is more likely attributed to foreign entities (read China) simply placing buy orders through UK brokers."

On what possible basis do you draw this conclusion? The UK purchases are more likely linked to the massive currency swaps the Fed entered into, the counterparties to which he claimed not to be aware...

www.youtube.com/watch?...

perhaps you should read this...

en.wikipedia.org/wiki/...

Whatever the reason, there is clearly a disconnect between the rally in equities and stability of bond prices which I greatly doubt it down to the Chinese...

Aug 24 09:08 AM

[Dave Wrixon:]

Well not only is your premise incorrect, but I rather suspect you have misinterpreted which side of the relationship the US falls on anyway.


On Aug 24 09:05 AM prairiedog555 wrote:

> The parasite cannot kill the host.

Aug 24 10:41 AM

[User 353732:]

Why is it assumed that the Chinese have no alternative at all to US Govt/Agency debt?
Even now they have 3 alternatives, that, cumulatilvely, are significant:
1. They can buy commodities in the ground: as they are doing in Russia, Latin America, Central Asia, Africa and Australia via a variety of financial transactions, only one of which is outright control of local operating companies
2. They can substantially expand the global footprint of major Chinese companies, all of whom are arms of the State
3. They can finance the inventory build up of manufactured goods at home and call the build up a gain in GDP since shipments from manufacturers to warehouses are deemed "sales" for GDP purposes
None of these can entirely repace buying more US debt but they dont have to; they provide the Chinese a graduated path away from the dollar as sole reserve currency first towards alternative, superegional reserve currencies and non-dollar denominated trade and then , later, to some other global reserve currency. Change occurs on the margin but the accumulating weight of change over 5 to 7 years can result in a "sudden" disruption.

Aug 24 11:05 AM

[thiazole:]

The US isn't the one manipulating its currency to keep an artificial trade surplus. I think he has the relationship correct. China is the parasite sucking US dollars and giving nothing in return. These are Chinese policies, not US, and if they don't change them, they will hurt themselves the most.


On Aug 24 10:41 AM Dave Wrixon wrote:

> Well not only is your premise incorrect, but I rather suspect you
> have misinterpreted which side of the relationship the US falls on
> anyway.

Aug 24 11:51 AM

[Dave Wrixon:]

They are supplying you with hard goods. You are paying them in increasing worthless paper. Most of the stuff the US has had from China has been bought with debt upon which you will almost certainly default.


On Aug 24 11:51 AM thiazole wrote:

> The US isn't the one manipulating its currency to keep an artificial
> trade surplus. I think he has the relationship correct. China is
> the parasite sucking US dollars and giving nothing in return. These
> are Chinese policies, not US, and if they don't change them, they
> will hurt themselves the most.

Aug 24 12:25 PM

[Dave Wrixon:]

Yes, and all the while the average redemption date of Chinese investments in US Bonds is shortening. The amount of finance they are giving is not just the total amount of money but it is the total x average redemption period. So the total amount of financing is collapsing. At some point it is all going to come due and the US will be forced to roll-over or refinance at very high interest rates. At which point the US will be insolvent. Bankrupt. Screwed. Whichever way you want to call it the dollar will be worth Zilch.


On Aug 24 11:05 AM User 353732 wrote:

> Why is it assumed that the Chinese have no alternative at all to
> US Govt/Agency debt?
> Even now they have 3 alternatives, that, cumulatilvely, are significant:
>
> 1. They can buy commodities in the ground: as they are doing in Russia,
> Latin America, Central Asia, Africa and Australia via a variety of
> financial transactions, only one of which is outright control of
> local operating companies
> 2. They can substantially expand the global footprint of major Chinese
> companies, all of whom are arms of the State
> 3. They can finance the inventory build up of manufactured goods
> at home and call the build up a gain in GDP since shipments from
> manufacturers to warehouses are deemed "sales" for GDP purposes<br/>None
> of these can entirely repace buying more US debt but they dont have
> to; they provide the Chinese a graduated path away from the dollar
> as sole reserve currency first towards alternative, superegional
> reserve currencies and non-dollar denominated trade and then , later,
> to some other global reserve currency. Change occurs on the margin
> but the accumulating weight of change over 5 to 7 years can result
> in a "sudden" disruption.

Aug 24 12:32 PM

[Dave Wrixon:]

Furthermore, it is likely the US will be forced to borrow in currencies other than Dollars and that will really hurt!

Aug 24 12:33 PM

[Zmartmoney:]

The dollar going away as reserve currency would result in nothing that looks like a slow decline - it would be a dramatic, long sell-off that only stabilized for moments at a time while sellers wait for that momentary stability to cash out some more. If we're the Titanic, loss of reserve currency status is a humdinger of an iceberg, right below the surface, dead ahead.


On Aug 24 07:23 AM Living4Dividends wrote:

> Great post.
>
> The dollar is going away as a reserve currency, no doubt about it.
> The question is when. The good news is that it is in China's best
> interest to make the transition an orderly process. The dollar's
> decline will be slow.

Aug 24 01:05 PM

[thiazole:]

But it is increasingly worthless because of Chinese policy. China is selling goods below value. Why wouldn't the US buy? Then China is fixing American goods way above value, so of course the Chinese aren't buying.


On Aug 24 12:25 PM Dave Wrixon wrote:

> They are supplying you with hard goods. You are paying them in increasing
> worthless paper. Most of the stuff the US has had from China has
> been bought with debt upon which you will almost certainly default.
>

Aug 24 01:07 PM

[Tony Daltorio:]

Any wonder the US is going down hill fast with comments like this?

The US is getting real goods from people who sweat, who actually work hard for a living.

In return, the US giving them worthless pieces of toilet paper that they never had any any intention of paying back. That's out and out a crime!

The US is simply the parasite which is feeding off the economically healthy host.


On Aug 24 11:51 AM thiazole wrote:

> The US isn't the one manipulating its currency to keep an artificial
> trade surplus. I think he has the relationship correct. China is
> the parasite sucking US dollars and giving nothing in return. These
> are Chinese policies, not US, and if they don't change them, they
> will hurt themselves the most.

Aug 24 04:55 PM

[Dave Wrixon:]

Spot on. When the markets see the light, it will all be over in months if not weeks. Yes, and of course it will bring chaos to the markets. Nobody ever said the dollar would pass on without significant disruption. But that disruption will not be most felt in China, although it will certainly have an impact.


On Aug 24 01:05 PM Zmartmoney wrote:

> The dollar going away as reserve currency would result in nothing
> that looks like a slow decline - it would be a dramatic, long sell-off
> that only stabilized for moments at a time while sellers wait for
> that momentary stability to cash out some more. If we're the Titanic,
> loss of reserve currency status is a humdinger of an iceberg, right
> below the surface, dead ahead.

Aug 24 05:57 PM

[Living4Divi...:]

I disagree, User 353732 -

You mentioned that China can buy things from "Russia, Latin America, Central Asia, Africa and Australia" While this will give China the commodities it needs/wants it does not help them get rid of nor invest unwanted dollars. They must buy from those countries in those countries local currencies.

In order to sterlize fx imbalances - an excess of DOLLARS, China needs to buy things from the US and pay in Dollars. This is the only way they can keep the Dollar propped up.


On Aug 24 11:05 AM User 353732 wrote:

> Why is it assumed that the Chinese have no alternative at all to
> US Govt/Agency debt?
> Even now they have 3 alternatives, that, cumulatilvely, are significant:
>
> 1. They can buy commodities in the ground: as they are doing in Russia,
> Latin America, Central Asia, Africa and Australia via a variety of
> financial transactions, only one of which is outright control of
> local operating companies

Aug 25 07:25 AM

[softwaresod...:]

It's not.

Sep 09 03:57 AM